Why is my home insurance replacement cost higher than market value?

Many homeowners are perplexed by the difference between their home’s market value and the replacement cost on their homeowner’s insurance policy. With falling market values, these numbers are getting further and further apart and many people wonder why the large discrepancy. Your homeowner’s insurance policy is a contract to rebuild your house, not to buy you another one just down the street.

While market values ​​appear to be declining further, reconstruction costs are still rising. The cost to rebuild your home is not the same as the sale price, and lowering your policy limits could be an adverse mistake. Rebuilding generally costs more than new construction because it involves removing debris and working around landscaping. These are things that are not taken into account in new construction. The market value of your home is not a good indication of the amount of insurance you should take out.

How are the renovation costs calculated? Each insurance company may handle this a little differently. However, the basic principle is the same. The costs are calculated based on information about your home. The square footage, number of bathrooms, exterior siding, among other factors, are all taken into account when this is calculated. It is important to estimate this as accurately as possible because many companies have a co-insurance clause. This is a provision in the insurance policy stating that a property must be insured at a certain percentage (usually 80%) of its value in order to collect the full amount of a claim.

There are ways to save money on your homeowners insurance policy without lowering your coverage amounts. Ask your insurance agent about money-saving discounts on protective devices such as deadbolts, sprinkler systems, and security systems. You may also consider increasing your deductible. Insure multiple policies with one insurer. Many companies offer discounts for your home and car insurance.

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